6 Questions Answered: Understanding and Avoiding Merchant Service Fees (2024)

In a world that’s dominated by credit and debit card payments, merchant fees are an unavoidable cost for the majority of hospitality businesses.

According to a recent payments survey, 60% of Australian businesses are concerned about the cost of their merchant service fees. However, there’s often confusion and uncertainty around what merchant fees are, how they’re calculated and if it’s possible to avoid paying them altogether.

In this article, we’ll deep dive into merchant service fees and answer 6 common questions hospitality business owners ask.

• What are merchant fees?
• How are merchant fees charged to your business?
• Can you recover fees through surcharging?
• How do you stay compliant when surcharging?
• Payment processor considerations
• How can Lightspeed help save money on merchant fees?

What are merchant fees?

Merchant fees are the fees your payment processor (usually a bank or payment provider) charges to your business for processing card transactions. This is typically a percentage of the transaction amount or a flat fee; however, prices can vary, and credit cards often incur higher merchant fees than debit cards.

In a nutshell, every EFTPOS transaction costs your business money, as each purchase made by your customers via an EFTPOS terminal incurs a merchant fee from your payment processor.

Payment processors clear transactions and then route and deposit the money into your bank account. They essentially act as the middle man between your venue, your customers, the card network (e.g. Visa or Mastercard) and the issuing bank.

In exchange for these services, payment processors charge a merchant services fee, usually between 0.5% – 2% of the transaction value. These fees cover fraud, handling costs and risks associated with processing transactions, such as bad debt.

On average, the most popular card types in Australia charge the following merchant fees:

• Visa and Mastercard – 1.5%
• Visa debit – 1%
• American Express – 2.6%

How are merchant fees charged to your business?

How and when your merchant fees are charged will vary from provider to provider. However, in many cases, ​​these fees will often appear as a single, combined amount on the bills from your payment processor.

When it comes to accounting, it’s important to exclude merchant fees from any sales that were made via your EFTPOS terminal. Merchant fees are essentially a business expense and should not be included in your total revenue.

Can you recover fees through surcharging?

The number of cash transactions has been steadily declining year on year in Australia. According to FIS, cash payments will drop to 2.1% by 2024. And our data shows that in October 2021, only 15% of transactions were made in cash in Lightspeed venues.

This dramatic decrease in cash transactions means businesses are processing considerably more card transactions than they did a few years ago, which means they have to pay more merchant fees.

Therefore, to help cover merchant fee costs, many businesses opt to pass these expenses onto their customers with a credit card surcharge.

Unsurprisingly, credit card surcharges aren’t always a hit with customers, so some businesses choose to forego charging this fee and factor the extra costs into their pricing instead. However, with a dramatic rise in operating expenses, many hospitality businesses are implementing surcharges to ease some of the current financial burdens.

How do you stay compliant when surcharging?

Charging a credit card surcharge is legal; however, the ACCC outlines strict guidelines that businesses need to follow. If a company or individual breaks the rules, they can receive a hefty fine and, in some cases, face community service and probation orders.

To remain compliant and avoid punishment, a business owner must understand the rules around charging excessive surcharges.

A surcharge is deemed excessive if your business recoups more from the customer than you pay to facilitate the transaction.

Let’s say a business charges a flat 50c surcharge for card payments under $10. If a customer purchases a drink for $4 with their debit card, the 50c fee equals a 12.5% surcharge. If their merchant fees for debit card transactions are only 1%, then the 50c surcharge would be deemed excessive, as it costs the business much less to accept the transaction.

Payment surcharge rules in Australia only allow businesses to recoup the costs of accepting certain payment methods. While the ACCC doesn’t specify an amount or percentage, they make it clear that any charge should only cover the cost incurred by the business.

The most common cost that a credit card surcharge can cover is the merchant fee. However, several other costs associated with card transactions can also be covered by a surcharge, such as the rental or maintenance fees for your card terminals and fraud prevention services.

If your business opts for a credit card surcharge, you must prove how these costs relate to certain card transactions made in your venue. The best way to do this is by saving any relevant payment contracts and invoices to use as evidence if needed.

Payment processor considerations

According to Statista, the number of EFTPOS terminals in Australia has grown by 269% since 1998, emphasising how consumers have steadily favoured cards and digital wallets over cash payments.

With cash on the decline, partnering with a payment processor to facilitate digital and card payments is a necessity for hospitality businesses. However, with so many options in the market, how do you choose the best solution for your business?

To narrow down your options, it’s important to research which payment processors integrate with your POS platform, the cost of their merchant fees and which features align most with your business goals.

Here are some points to consider before choosing a payment processor:

• Setup costs
• Monthly fees
• Merchant fee rates
• Payment gateway setup
• PCI compliance
• Credit card fees
• EFTPOS terminal usability
• Automatic reconciliation with your POS
• Automatic or same-day settlements into your bank account
• Accept a wide variety of payment methods, including Apple Pay and Visa

How can Lightspeed help save money on merchant fees?

Lightspeed is an all-in-one POS and Payments solution built for hospitality businesses. Like other payment processors, Lightspeed Payments offers everything from automatic reconciliation to contactless payments and fraud prevention. The only difference? Everything is connected within one centralised system for simple business management.

When it comes to merchant service fees, Lightspeed Payments has an automatic surcharging feature that allows you to pass on any card processing fees to customers – essentially making your transaction fees 0%.

Lightspeed Payments also has several other benefits, including:

• Flexible payment options for the best customer experience
• Automatic reconciliation saves time on end-of-day reports
• Integrated EFTPOS payments speed up service and reduce errors
• Split bills, add tips and process refunds and add surcharges for speed and convenience
• Built-in PCI compliance and fraud prevention for peace of mind
• Detailed reports to dig into your data and identify payment trends
• 24/7 comprehensive support, whenever you need it

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